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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1933
For the quarterly period ended November 24, 1995
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1933
For the transition period from
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to
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Commission File
Number 33-16098
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THE EARTH TECHNOLOGY CORPORATION (USA)
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0244112
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West Broadway, Suite 5000
Long Beach, California 90802-5785
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(Address of principal executive offices) (Zip Code)
Registrant's tel. number, including area code: (310) 495-4449
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Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1933 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Number of shares of common stock, $.10 par value, issued and outstanding as of
January 5, 1996 -- 8,775,077.
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INDEX
PAGE
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets -
November 24, 1995 (unaudited), and
August 25, 1995 (audited) . . . . . . . . . . . . 1
Consolidated Statements of Operations
Three Months Ended November 24, 1995
(unaudited), and November 25, 1994
(unaudited) . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flow
Three Months Ended November 24, 1995
(unaudited), and November 25, 1994
(unaudited) . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements
(unaudited) . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . . . . . . . . . . . 10
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities . . . . . . . . . . . . . . 12
Item 3. Defaults Upon Senior Securities . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of . . . . . . . 12
Security Holders
Item 5. Other Information . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 12
Signatures
Exhibit 11.1 Statement RE: Computation of Per Share
Earnings, Three Months Ended November 24, 1995 (unaudited)
THE EARTH TECHNOLOGY CORPORATION (USA)
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)-(Note 1)
(In thousands)
CURRENT ASSETS (Audited)
November 24, August 25,
1995 1995
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Cash and cash equivalents $ 1,203 $ 4,572
Contract receivables (Note 3),
less allowance for doubtful
accounts of $2,095 at
November 24, 1995 and $2,026
at August 25, 1995 52,006 53,172
Notes and other receivable 2,253 2,224
Prepaid expenses 1,139 1,969
Deferred income taxes 2,835 2,361
Other current assets -- 791
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TOTAL CURRENT ASSETS 59,436 65,089
PROPERTY AND EQUIPMENT
Land and Buildings 6,344 6,005
Field and laboratory equipment 5,635 5,925
Office furniture and equipment 16,920 16,449
Transportation equipment 3,247 3,243
Equipment under capital leases 1,348 1,616
Leasehold improvements 1,389 1,433
Construction in progress 816 642
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Total 35,699 35,313
Less accumulated depreciation and
amortization 20,553 19,871
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Property and equipment, net 15,146 15,442
Goodwill 11,851 11,936
Other assets 2,902 2,579
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TOTAL ASSETS $89,335 $95,046
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See Notes to Consolidated Financial Statements.
-1-
THE EARTH TECHNOLOGY CORPORATION (USA)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)-(Note 1)
(In thousands)
(Audited)
November 24, August 25,
1995 1995
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CURRENT LIABILITIES
Accounts payable $ 12,373 $ 14,466
Billings in excess of revenues 6,815 6,267
Accrued payroll and related
liabilities 6,166 7,913
Other accrued liabilities 1,909 3,583
Current portion of long-term debt 1,052 1,196
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Total Current Liabilities 28,315 33,425
Revolving credit agreement 17,550 18,700
Long-term debt 4,194 4,476
Other long-term liabilities 3,717 3,769
Subordinated debt 10,000 10,000
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Total long-term liabilities 35,461 36,945
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TOTAL LIABILITIES 63,776 70,370
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STOCKHOLDERS' EQUITY
Preferred stock -- $.10 par
value; 5,000,000 shares
authorized, none issued
Common stock - $.10 par
value, 20,000,000 shares
authorized; 8,833,520 issued
and 8,754,531 shares
outstanding: (8,697,869 at
August 25, 1995) 883 877
Additional paid-in capital 36,859 36,613
Deficit (11,897) (12,528)
Less treasury stock 78,989
shares at November 24, 1995
(78,989 at August 25, 1995),
at cost (286) (286)
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TOTAL STOCKHOLDERS' EQUITY 25,559 24,676
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TOTAL LIABILITIES AND EQUITY $ 89,335 $ 95,046
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See Notes to Consolidated Financial Statements.
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THE EARTH TECHNOLOGY CORPORATION (USA)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
THREE MONTHS ENDED
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November 24, November 25,
1995 1994
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Gross revenues $ 43,855 $ 47,970
Less direct project costs (16,841) (18,953)
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Net revenue 27,014 29,017
Other costs and expenses:
Direct labor and related costs 12,880 13,069
Indirect expenses 12,219 12,933
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Total operating expenses 25,099 26,002
Operating income (loss) 1,915 3,015
Interest and other income 72 38
Interest expense (820) (720)
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Income from continuing operations
before income taxes 1,167 2,333
Provision for income taxes 478 928
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Net income from continuing operations 689 1,405
Loss from discontinued laboratory
operations net of income tax benefit (59) (133)
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Dividend requirements on
preferred stock -- 63
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Net income applicable to common stock $ 630 $ 1,209
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Net income per share from continuing
operations $ 0.08 $ 0.15
Net loss per share from discontinued
operations (0.01) (0.01)
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Net income per share $ 0.07 $ 0.14
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Weighted average common shares
outstanding 8,876 8,960
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See Notes to Consolidated Financial Statements.
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THE EARTH TECHNOLOGY CORPORATION (USA)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(In thousands)
THREE MONTHS ENDED
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November 24, November 25,
1995 1994
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Net income $ 630 $ 1,272
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation/amortization 1,140 1,365
Provision for losses on contract
receivables 69 69
Deferred income taxes (474) (770)
Change in assets and liabilities:
Contract receivables 1,097 (688)
Notes, prepaids and other assets 1,269 650
Accounts payable (2,373) 621
Other liabilities (2,924) 788
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Cash Provided by (Used in) Operating
Activities (1,566) 3,307
Proceeds from disposals 474 --
Purchase of property and equipment (953) (1,276)
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Cash Used in Investing Activities (479) (1,276)
Principal payments on debt obligations (22,125) (24,204)
Borrowing from debt obligations 20,550 22,643
Sale/repurchase of common stock, net 251 205
Dividends on preferred stock (63)
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Net Cash Used in Financing Activities (1,324) (1,419)
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Net Increase (Decrease) in Cash and
Cash Equivalents (3,369) 612
Cash and cash equivalents at beginning
of period 4,572 2,803
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Cash and cash equivalents at end of period $ 1,203 $ 3,415
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Interest paid during period $ 238 $ 620
Income taxes paid during period 410 974
Capital lease obligations from
purchase of equipment 228 52
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THE EARTH TECHNOLOGY CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share data)
NOTE 1 - DISCONTINUED OPERATIONS
On August 11, 1995, the Company adopted a plan to sell its remaining
laboratory operations and discontinue that line of business. In conjunction
with this action, the Company recorded a net after-tax loss of $660,000
relating to the expected loss on the sale of laboratory assets. The company
completed the sale of its remaining laboratory operations in November, 1995.
The disposal of the laboratory operations has been accounted for as a
discontinued operation and accordingly its operating results are segregated
and reported as discontinued operations in the Consolidated Statement of
Operations. Prior year financial statements have been reclassified to conform
to the current year presentation.
The condensed statements of discontinued operations for the fiscal quarters
ended November 24, 1995 and November 25, 1994 are as follows:
(In thousands) 1995 1994
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Sales $1,143 $3,326
Intercompany sales 491 797
Income(loss) before tax (98) (213)
Income tax (benefit) (39) (80)
Income (loss) ($59) ($133)
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NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended November 24, 1995 are not necessarily indicative
of the results that may be expected for the year ended August 30, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto incorporated by reference in The Earth Technology
Corporation (USA) annual report on Form 10-K/A for the fiscal year ended
August 25, 1995.
Earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding.
-5-
NOTE 3 - CONTRACT RECEIVABLES
Contract receivables consist of the following (in thousands):
November 24, August 25,
1995 1995
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U.S. Government:
Amounts billed $11,912 $11,655
Unbilled contract costs and fees 6,041 10,935
Retentions, due upon completion of contracts 1,836 1,761
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Total U.S. Government 19,789 24,351
Commercial:
Amounts billed 26,669 26,298
Unbilled contract costs and fees 6,761 4,014
Retentions, due upon completion of contracts 882 535
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34,312 30,847
Less Allowance for doubtful accounts 2,095 2,026
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Net Commercial 32,217 28,821
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Total contract receivables $52,006 $53,172
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Amounts not billable at November 24, 1995, under specific conditions of the
applicable contracts, are expected to be billed within one year.
Amounts not paid by customers pursuant to retention provisions in contracts
will be due upon completion of the contracts and acceptance by the customer.
NOTE 4 - CREDIT AGREEMENT
In May 1994, the Company entered into a revolving credit agreement with a
bank, secured by substantially all of its assets, which provided for
borrowing to a maximum of $20 million, subject to a formula based on eligible
accounts receivable. This agreement replaced a prior revolving credit
agreement. The agreement was amended in February, 1995 to provide a maximum
borrowing of $25 million. On June 26, 1995, the agreement was further
amended to provide a temporary increase until October 30, 1995, in the
advance rate from 75% to 85% of eligible accounts receivable. The revolving
line of credit expires May 24, 1997.
The agreement allows for borrowing at a floating interest rate based on the
bank's reference rate, or on Eurodollar rates for specified periods of time.
A premium of 0% to .5% may apply to the bank's reference rate and a premium
of 2.0% to 2.5%
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may apply to Eurodollar rates depending on certain cash flow ratios measured
at each fiscal quarter end. The Company is currently paying a .25% premium
over the bank's reference rate and a 2.25% premium over Eurodollar rates. At
November 24, 1995 the company's actual rates are 8.0625% to 8.125%.
The credit agreement places various restrictions on the Company, including
certain prohibitions on the payment of dividends and additional borrowing,
and provides that specific financial ratios be maintained. The Company was in
compliance with all covenants at November 24, 1995.
NOTE 5 - LITIGATION
As a professional services firm engaged in engineering and environmental
safety matters, the Company encounters potential claims, including claims for
environmental damage, in the normal course of business. The Company
practices a vigorous response to such claims including a legal defense when
necessary.
To minimize its risk against these claims, the Company promotes risk
management techniques when providing professional services. The Company also
maintains an insurance program which includes coverage for environmental and
asbestos claims related to its business.
Certain pending legal actions, which are described below, make claims for
substantial damages which, if awarded, would have a material adverse effect
on the Company's financial position and the results of its operations.
(1) One of the Company's subsidiaries, Alternative Ways, Inc. (AWI)
has been named a co-defendant in certain action filed on October 9,
1990 in the Supreme Court for the State of New York, County of New
York. Other defendants in the lawsuit include Madison Square Garden
Corporation, Paramount Communications, Inc. and Herbert Construction
Company/HRH Construction Corporation. Plaintiff, an asbestos
abatement contractor, seeks $20 million in compensatory damages and
up to $100 million in punitive damages. While this dispute involved
asbestos removal, Plaintiff makes no environmental claim related to
asbestos. Plaintiff rather alleges that defendants misrepresented
the job and underpaid for the work. AWI vigorously denies these
assertions and had no contractual relationship with the Plaintiff.
(2) A California, nonprofit homeowners association, Canyon Estates
Community Association, commenced on November 25, 1992 a civil action
for negligence in Superior Court for the County of Orange California
against the company and twenty-two other defendants including
certain soils engineering firms, certain land developers and certain
home builders. As to the Company, the suit challenges certain
preliminary soils engineering work completed in the mid-1980s. In
December, 1994, Plaintiff presented the Defendants with an expert
witness report which asserts corrective remedies will cost more than
$140 million. The Company vigorously disputes this opinion and any
claim of liability against it.
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(3) In a series of lawsuits, various property owners, merchants,
residents, and tenants located on Hollywood Boulevard in Los
Angeles, California have filed nearly identical multi-count civil
actions in Superior Court for the County of Los Angeles against the
Los Angeles County Metropolitan Transportation Authority and
approximately 50 contractors associated with the metro rail project,
including the Company. The first lawsuit in the series naming the
Company as a defendant was filed on April 28, 1995. These legal
actions seek unspecified damages and other judicial relief for
damages arising out of the construction of the Metro Rail red line
along Hollywood Boulevard. The Company intends to vigorously
dispute any claim of liability against it.
Because the three cases are at an early stage in the legal process, the
ultimate outcome or the range of costs, if any, cannot be determined at this
time.
There are other claims and suits pending against the Company for alleged
damages to persons and property and for alleged liabilities arising out of
matters occurring during the normal operation of the Company's business. In
the opinion of management, the uninsured liability, if any, of these other
claims and suits would not materially affect the financial position or
results of operations of the company.
NOTE 6 - CONTINGENCIES
U.S. Government contracts are subject to government audit. Such audits could
lead to inquiries from the government regarding the appropriateness of
expenses under the U.S. Government regulations. The management of the
Company believes that such inquiries, if any, will not result in material
changes to revenues recorded.
NOTE 7 - SPECIAL CHARGES
Special charges have been included in operating expenses in each of fiscal
years 1993, 1994, and 1995. A summary of the charges, remaining reserves at
November 24, 1995, and the expected period of utilization of the remaining
reserves is as follows:
Remaining Expected
Amount Reserves Period of
Charges (In thousands) (In thousands) Utilization
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1995 - HWI merger costs $ 4,315 $ 20 Fiscal 1996
1994 - Summit merger costs 4,993 0 --
Minneapolis office
closure 1,880 208 Fiscal 1996
1993 - Writedown of goodwill 11,259 -- --
Administrative consolidation
writedown of unfavorable Four years
lease 3,741 1,587 of lease
-8-
NOTE 8 - MERGERS AND ACQUISITIONS
On December 8, 1995, the Company entered into a definitive agreement to
acquire Barrett Consulting Group (Barrett). The agreement provides for
Barrett to merge with a wholly-owned subsidiary of the Company in a
transaction to be accounted for as a purchase. The final purchase price will
be determined as a multiple of Barrett's net assets at September 1, 1995,
after review by the Company's auditors.
Revenues and earnings for Barrett for its most recent fiscal year and interim
periods are:
Audited Unaudited
Fiscal Year Ending Six Months Ending
February 28, 1995 September 1, 1995
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Gross revenues $26,424 $10,187
Operating income 1,139 566
Net income 547 275
Current assets 7,138 7,370
Other assets 1,325 793
Current liabilities 5,194 2,171
Other liabilities 556 2,649
Shareholders' equity 2,713 3,332
On December 11, 1995, the Company entered into a definitive agreement to be
acquired by Tyco International Ltd. Under the agreement, a subsidiary of
Tyco commenced a tender offer to purchase all of Earth Tech's 8,752,000
shares of common stock for $8 per share in cash, for a total of approximately
$70 million. The tender offer will be followed by a merger in which each of
the remaining shares of the Company will be exchanged for $8 in cash.
The offer is conditioned on the tender of a majority of the outstanding
shares of common stock on a fully-diluted basis, as well as certain other
conditions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash balances of $1,203,000 at November 24, 1995
compared to $4,572,000 at August 25, 1995. Negative cash flow from
operations totaled $1,566,000 for the first three months of fiscal 1996.
Capital expenditures for the first three months of fiscal 1996 totaled
$953,000 and are expected to total approximately $5,000,000 for the fiscal
year, principally for office and field equipment and computers.
Historically, the primary sources of working capital have been
internally-generated funds from operations and bank revolving credit
agreements. Acquisitions were financed through the issuance of various
subordinated debt instruments, preferred stocks and common stock.
The Revolving Credit Agreement borrowings are based on eligible
accounts receivable to a maximum of $25,000,000. Under the formula the
maximum borrowings allowed at November 24, 1995 was $20,570,000. The
agreement, signed in May, 1994, amended in February, 1995 and expiring in
May, 1997 requires the Company to maintain certain covenants measured on a
quarterly basis. The Company was in compliance with all covenants at
November 24, 1995. The Company had an outstanding balance at November 24,
1995 of $17,550,000 and at August 25, 1995 of $18,700,000
Management believes the amounts available under the Company's
Revolving Credit Agreement together with the funds generated by operations
will be sufficient to meet the Company's anticipated working capital
requirements.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
FIRST QUARTER COMPARISON FOR THE FISCAL YEARS 1996 AND 1995
Gross revenues for the first quarter were down 8.6% to $43,855,000
in fiscal year 1996 versus $47,970,000 in 1995. Net revenue decreased 7.0%
for the same period to $27,014,000 in fiscal 1996 from $29,017,000 in fiscal
1995. Demand for environmental services remains sluggish as a result of
continuing uncertainty in the federal regulatory and budgetary environment
and a resulting slackening of enforcement activity. Offsetting this was a
44% increase in revenues for contract operations of water and waste water
facilities, and significant increases in engineering services for industrial
facilities and municipal infrastructure projects.
Direct labor and related costs decreased 1.4% over 1995 and were
47.7% of net revenues compared to 45.0% a year ago. The increase as a
percent of net revenues was primarily due to reduced disposal and other
subcontracted activities in remediation services and the effect of
competitive commercial pricing.
Indirect expenses decreased 5.5% compared to the year earlier
quarter, primarily due to savings resulting from the cost reductions
implemented in 1995.
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Interest expenses have increased as a result of higher debt levels
due primarily to the redemption of $2.5 million of preferred stock for cash in
May, 1995 and the Company's negative cash flow from operations.
Income tax expense of $478,000 for the quarter reflects a tax rate
of 41%. In 1995 the tax rate was 40%.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
Gross revenues from discontinued operations were down 66% to $1,143,000 from
$3,326,000, while net revenues were down 64% from $2,902,000 to $1,035,000.
The first quarter of fiscal year 1995 included results from operations of
various laboratories, which were sold in fiscal 1995, accounting for nearly
50% of the gross revenue decrease. The balance of decreased revenues result
from reduced levels of demand for certain laboratory services.
The net after-tax losses totaled $59,000 for the first quarter of fiscal 1996
as compared to a net after-tax loss of $133,000 in the same period last year,
primarily as a result of lower indirect costs resulting from smaller
operations and cost-cutting measures.
-11-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes have occurred in pending material litigation. For
further discussion, see Note 5 to the Consolidated Financial
Statements.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
The registrant filed Form 10-K/A dated December 20, 1995 and
Schedule 14D-9, Solicitation/Recommendation Statement pursuant to
Section 14(d) of the Securities Exchange Act of 1934, on December
13, 1995, regarding the Definitive Acquisition Agreement with
Tyco International Ltd.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 Statement RE: Computation of Per Share Earnings,
Three Months Ended November 24, 1995 (unaudited)
Exhibit 2, Schedule 14D-9, Solicitation Recommendation
Statement. Pursuant to Section 14(d) of the Securities and
Exchange Act of 1934.
(b) Reports on Form 8-K
Not applicable.
-12-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Earth Technology Corporation (USA)
(Registrant)
Date: January 5, 1996 By: CHARLES S. ALPERT
---------------------------------
Charles S. Alpert
Corporate Secretary
Date: January 5, 1996 By: CREIGHTON K. EARLY
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Creighton K. Early
Chief Financial Officer
(Principal Financial
and Accounting Officer)